The world economic depression is a dire threat to the national security of the United States. To date, little or nothing has been done to address the causes of the depression and rebuild the economy. With the lack of leadership and vision in the western world, the depression will continue until the Anglo-American economic system known as the Washington Consensus self-destructs. This is occurring rapidly, and the Beijing Consensus is being asserted to replace it. At some point during this process the center of world politics, economics and military power will shift to North East Asia. This shift will not happen peacefully, and system wide warfare is the likely outcome if this breakdown crisis is allowed to run its course.

Let us be clear that we are in a depression on par with the Great Depression, not a downturn, a slowdown, a rough patch or a recession. Housing values have already fallen on average 26%, and during the Great Depression they fell 25.9% (1). We are not at the bottom for real estate by any means either. Unemployment the way it was measured back then was at least 24.9% (2). Today by those measures it stands at about 23% (3). Let there be no mistake, we are in an extreme crisis. The purpose of this passage is to emphasize the magnitude of the crisis. Calling it by other names and creating a false propaganda reality will only delay the actions needed to combat the depression. The longer our leaders delude themselves, the more severe the crisis will become.

Derivatives are the Cause of the Depression

The origin of the crisis lies in deregulated credit derivatives of various types. The proper way to understand derivatives is that they are some form of paper based on paper. Anytime we are more than one step removed from an underlying asset we are dealing with derivatives. The Bank of International Settlements admits that there are around ~$600 trillion in derivatives out there (4). This is more than ten times the entire GDP of the Earth, which is about ~$58 trillion. Other sources indicate that the outstanding amount of derivatives of all types approached ~$1.5 quadrillion, and has now fallen to a mere ~$1 quadrillion (5). A dangerous feature of derivatives is that they are zero sum instruments, in that there is always a winner and a loser. This means that every derivative represents some amount of debt that someone will have to pay at some point in the future, with the notional fulfillment value much higher than the market value of the instrument.

These derivatives are controlled by globalized finance oligarchs based primarily in New York and London. These oligarchs dominate the governments of most western countries, and they have abused their power by making the sole mission of the state that of propping them up. All of the other concerns of the nation states of the world are regarded as secondary to the effort to rehabilitate the cancerous mass of $600 trillion-$1.5 quadrillion of derivatives. The United States cannot recover until Wall Street is stopped and put into receivership by the federal government, and the derivatives are liquidated in bankruptcy proceedings. The Special Inspector General of the Troubled Asset Relief Program (SIGTARP) Neil Barofsky reported to Congress that as of 2009 the potential public liabilities from the banking bailouts of various types were already at $23.7 trillion just for the United States (6). The Wall Street banking cartel, and the London oriented Inter-Alpha Group of Banks are already bankrupt. They exist as economic wards of the state, and survive only because of vast amounts of public money. The deregulated markets that they need in order to operate are also responsible for tremendous instability around the world. Here is the example of Federal Reserve (The Fed) Chairman Bernanke’s Quantitative Easing II (QE2) bailout program, and how it is contributing to the destabilization of the world.

Banker Bailouts Destabilize the World

QE2 is by no means the only liquidity vehicle being used to recapitalize the banks, but it is a discrete example that can be used in the space available here. All of the money coming from the other unmentioned credit facilities is subject to the same logic presented here on QE2. QE2 involves the Federal Reserve engaging in open market operations to monetize ~$110 billion per month of treasury securities in the 7-10 year range, and this is ongoing. This means they print the money and give it to the banks, and the treasury securities go onto the Fed balance sheet.

The money that the banks get is not regulated, and they can use it anyway that they want to. Since the Fed maintains its interest rate at .25%, the banks have a hard time making any money in the United States. This money becomes flight capital because of this. The banks send it to speculate in emerging markets, commodities exchanges, foreign exchange markets and derivatives. Emerging markets are experiencing speculative booms and busts because of this hot money, and this is destroying jobs and social order across the third world. This constant huge influx of flight capital is driving up the currencies of exporting nations like Brazil and Japan, and stoking high inflation in China because of the Renminbi peg to the dollar. The Finance Minister of Brazil has stated that currency war has already broken out around the world (7). This analysis of QE2 is supported by Joseph Stiglitz in an interview with the London Telegraph (8).

When this money hits deregulated commodities markets we see speculative booms in prices to unprecedented levels, and this includes food stuffs. Food prices are at all time highs, and have risen dramatically in the last year (9). Much of the unrest across North Africa and in the Middle East is the result of massive increases in food prices. In areas where large sections of the population survive on $2 per day or even less, this is a matter of life and death. Chairman Bernanke’s banking bailout activity is destroying the geostrategic position of the United States around the world as friendly regimes fall, or are destabilized and weakened. America’s influence throughout the entire third world is now seen to be in decline because of the depression. The growing un-governability in the United States may drastically accelerate the crisis as well.

The approaching danger here lies in the destabilization of the US Treasury market. Brief explanation is required. The only source of US dollars in the world is here in the US, not in China, or anywhere else. Congress first appropriates money into existence to do various things, and second authorizes bonds to be issued by the treasury. The media deceives people into believing that it is the other way around, and this leads to confusion. Part of the money appropriated into existence goes to fund the trade deficit with China. The bonds that are issued from the treasury allow China a place to invest those dollars without driving up prices in other markets. Limiting the availability of bonds to soak up these dollars is dangerous to the international currency system, and the mass of derivatives associated with it.

The House Republicans are playing a game of brinksmanship with President Obama and the Democrats over the US debt ceiling this spring. This is an ideological and demagogic exercise. If the ceiling is not raised, no new bonds can be issued. This does not stop congress from spending money, because the government is the sole source of new dollars in the world. It also does not stop the trade deficit from continuing either. It just means that as the deficit continues, and treasury bonds are naturally redeemed over time, there will not be enough new bond issues to roll over into. In order to have economic stability in a situation like this the federal deficit would have to quickly fall to an amount equal to interest payments on the debt plus bond redemptions, and there would have to be no trade deficit. This would allow enough month to month roll over room to keep the current dollar supply locked up in bonds.

Since that level of cutting cannot and should not happen, it means that hundreds of billions of dollars that are currently locked up in the secondary treasury market will suddenly be forced to start competing for scarce goods and services around the world. This could cause a dramatic currency crisis, and bring a new wave of mass panic to nations around the world. With the world economic system already battered from the depression, there is no telling how the system would react to this potentially huge shock. Our leaders would be wise to back away from the abyss, and not test the theory.

Anglo-American Institutions in Crisis

The post-WWII international financial institutions dominated by the Anglo-Americans are also collapsing. The World Bank, dominated by the Washington Consensus, has fallen behind the Chinese in lending to developing countries. The World Bank loaned out ~$100 billion from mid-2008 to mid-2010. The Chinese Development Bank and Export Import Bank lent ~$110 billion during a comparable period of time (10). This means that western influence is waning all across the third world. Africa, Latin America and South Asia are turning increasingly to Beijing and not Washington for economic development. This translates directly to loss of strategic position and influence around the world.

China is overtaking the United States economically at an alarming rate. Chinese financial institutions have overtaken the World Bank in lending to developing countries. In 2010 China surpassed America in total energy consumption (11). China is projected to pass America in manufacturing either this year or in the next few (12). America has been the greatest manufacturing nation in the world for 110 years, and when we took the crown from Britain we became the greatest nation in the world. America will cease to be the greatest nation in the world when it is surpassed in industrial capability by China.

The GDP measurement appears to give America some breathing room with the US at $14.6 trillion and China at $5.7 trillion. GDP measurement should not fool anyone though, because it is a fraudulent measure of economic strength. This is because GDP counts everything that goes on in an economy. In the world of physical economy and national greatness many things do not count: narcotics trafficking, money laundering, gambling, pimping and prostitution, lawsuits, and generally all forms of Wall Street related speculative activity. In real physical terms the Washington Consensus is being defeated by the Beijing Consensus, and the change over in domination of the world system is not likely to be peaceful.

John Mearsheimer argues convincingly that potential military power derives from economic power, and potential economic power derives from population size. The unproductive activities listed above contribute to GDP, but not to potential military power and therefore should not be counted economically from the point of view of strategy. If American leaders make the mistake of believing the GDP measure, they will believe that the nation possesses more potential military power than it actually does. When leaders believe that they have significantly more power than they actually do, it is easy for otherwise rational actors to commit huge blunders.

China, Russia, and the many nations looking to them for help and protection will assert their national interests more and more against the United States over the coming years. As the crisis deepens in these countries, problems will have to be blamed on someone. Some of the problems will really be their own fault, some really will be America’s fault and it will not matter which is which. In America similar demagogic things are happening already. The obsessive, compulsive focus on the Chinese Renminbi exchange rate is a prime example. This is a mask for the larger problems of free trade, globalism and deregulation that lie at the heart of the system here. These problems will not be addressed, so there must be a suitable stand in to be blamed for all of our ills. Years of this type of propaganda on both sides sets the stage for escalating levels of confrontation. The danger of system wide warfare is real.

There is no certainty in how this conflict will play out. Of course, the apocalyptic scenarios are possible, featuring direct confrontation between great powers. The more likely scenario is already in play, and involves decades of low level guerilla war and regional scale war. The first decade of this is already completed, and in the books. These wars will prohibit industrialization and economic development across the third world, and allow the real culprits behind the crisis to fade into the background unpunished. China and Russia will begin to intervene by proxy in these brushfire wars and coups across the third world. As time goes on, the reasons for the collapse of world civilization will become less and less clear as the wars take on lives of their own. An entire generation doomed to falling standards of living, and even immiseration, will fight a thousand small endless wars as fascist corporatism dominates the formerly free nations of the West.

The only way for the United States to avoid this fate is to return to its economic traditions. End globalization, the free trade mania and bring back the protective tariff. Break up finance capital with a new Glass-Steagall Act. Bringing industrial development back to this country will automatically put tremendous internal pressures on rival nations when they are no longer able to rob America blind for free. This will preserve the reserve currency status of the dollar, and stabilize markets around the world. Force the Chinese economic engine to fuel itself, and the Chinese Miracle will be shown to be an empty illusion.